I’ve been running a bunch of money almost as long as Warren Buffett, but Warren’s made a bigger pile. I am CEO, CIO and founder of Atalanta Sosnoff Capital, LLC, a private investment management company with $6 billion in assets under management. Sold my Geico and American Express holdings prematurely, but sported one of the first beards on Wall Street in 1964.

I was a hedge fund operator when only a handful of investors could define this construct. Later, I made a hostile tender for Caesar’s World, but my corporate clients frowned on this gambit. Today, activist operators like Carl Icahn stand revered as saviors.

While a Forbes columnist for many years, the late, great editor of Forbes, Jim Michaels, forbade me to use Yiddish expressions because his readers in North Dakota wouldn’t get it. Alas, I can’t make a living as a writer. I’ve learned to be Humble On Wall Street. Silent Investor, Silent Loser embraces a shareholder activist theme along with my love of France and contemporary art.

9/04/2012 @ 1:54PM21,902 views

Is Apple Worth $400 Or $900?

Currently surfacing are analysts’ music sheets rationalizing Apple as a $900 piece of paper. I’ve seen one $1,100 number, but reasoning is flimsy. Apple’s market cap may approach $900 billion. Then, it accounts for nearly double Exxon Mobil’s 3.8 percent weighting in the index. 2G2BT?

What will Apple’s price-earnings ratio look like at $900 a share? With a strong sell through of iPhones and iPads next year I would expect to see consensus earnings projections for fiscal 2014 fix on approximately $60 a share. This would put Apple’s price-earnings ratio at 15 times, what the market sells for in a buoyant setting of low interest rates, modest inflation and high single-digit earnings growth for major multinational corporations.

A handful of tech stocks account for one-third of the market value of the top 25 names in the S&P 500 Index starting with Apple, now an unprecedented 5 percent weighting. In recent years Exxon Mobil dominated the index with a $400 billion market capitalization. Microsoft was numero uno long ago and far away.

The market is driven by these top 25 names. They comprise nearly 40 percent of the S&P 500 Index’s valuation. Technology, in turn, counts up to one-third of the top 25’s valuation. If Apple’s iPhone 5 is a hit next month along with its coming 7-inch iPad, the stock has $750 written all over it.

When I scroll down the list of big cap technology, I can’t find any names selling above 15 times forward 12-month earnings projections. Microsoft, Oracle and Intel coalesce closer to 10 times earnings. Qualcomm, pretty much tied to the unfolding smart phone story, is somewhat pricier, but still in the mid-teens valuation zone.

Amazon remains the sole iconic growthie selling as if it were the year 2000 when Internet properties got rationalized on the basis of pops, hits and multiples of revenues. Some of these doggies exceeded a 10-times revenue multiplier. Amazon, today with a market cap pushing $110 billion sells under 2 times estimated 2013 revenues and by 2014 probably at one times revenues and hopefully, $7.50 a share in earning power. As a $245 stock, Amazon’s price-earnings ratio is still a heady 33 times my 2014 estimate.

What am I doing with a serious position in Amazon at such an extended valuation? Well, growth stock investing boils down to how far out you need to go to justify your position. Obviously, I don’t believe the trajectory in Amazon’s revenue growth and therefore its coming profit margin explosion gets capped by 2014.

I see Amazon as the Wal-Mart of the Internet, employing balance sheet strength to locate warehouse and fulfillment centers in population clusters wherever someone else’s big box rests. Best Buy seems toast in its present format.

Retailers turn into the walking wounded or succumb. Amazon’s overhead is now a fraction of even Wal-Mart, which carries 2 million employees in over 10,000 retail outlets, worldwide. Wal-Mart is not known for overpaying its “associates,” either.

If I’m wrong on Amazon as the iconic, unfolding growth story, bar none, schmeiss the stock in half. I’ll lick my burnt fingers and soldier on. Everything else that I inventory excepting Qualcomm, is dirt cheap. My list includes Google, Apple and Microsoft, along with IBM.

Apple is the most curious case of all. By yearend 2014 its cash hoard could approach $200 billion. This is more capital than all but the top ten names in the S&P 500 Index sell for. Number 10 is Berkshire Hathaway and right above that comes AT&T.

And, yet, the market disdains Apple’s boodle. For sure, most of it rests abroad, un-taxed. So, unless Apple cares to raise debt to drive dividend paying capacity, don’t expect the payout ratio of earnings ever to move above 25 percent. On $60 a share for 2014, I project dividend paying capacity of $15, some 50 percent above the current dividend rate. Nothing to write home about, but I’ll take it. The S&P 500 Index currently yields under 2 percent which is probably where it will rest 18 months out.

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Well written article! I would be leery of Samsung though, they are a handset manufacturer that doesn’t do software. Their OS is Google’s, and Google will compete directly with them going forward, guess who wins. Samsung’s core business are electronic components – Processors, Displays, Flash, Etc. Apple is their biggest customer, and Apple is shifting their sourcing from Samsung as quickly as possible to TSMC, LG, Corning, Sharp, Etc. It will take a few years, and you will see Samsung’s earnings take a steady hit over that period. Last point; I believe you are seriously undersestimating Apple’s earnings growth rate for the next 3 years, Even with a 15 p/e, which is fair, Apple will be at $1000 by Jan-2014. Thank you for your article…

Re: “Unlike Apple, Samsung is a fully integrated producer of smart phones and tablets. Its productive research and development programs have left Sony and other Far Eastern players in the backwaters.”

I appreciate your analysis and insight; however, I’d like to note that Samsung is the furthest-flung thing from a fully integrated producer of these technologies. Samsung makes knock-off products; they fabricate, not design. Furthermore, half of the entire equation in their phone and tablet products comes from Google – the operating system, Android.

Further, in re: “The critical, still unknowable variable in Apple’s stock price trajectory is when does the smart phone product sector peak out? After all, iPod reached saturation years ago. Is everyone on the planet going to carry a smart phone of some kind? Hardly.”

I would note that the iPod reached saturation in large part due to the introduction of the iPhone, which integrated iTunes Store media purchasing and playback, and which with the introduction of iOS 6 in coming weeks will strengthen this position through synchronization of media through the cloud between clusters of devices for a given user or their family. Eating your own young isn’t entirely savory, but it’s better than having your young eaten by others. Also, the conclusion of this graft – that it is hardly likely that everyone on the planet may end up with a smartphone device – is reminiscent of early projections that there would be a world market for around 5 computers, total. Inroads into growth markets (BRIC etc.) with their aspirational new-money middle class eager to embrace and flaunt their newfound success may continue driving premium technology margins for the 5-year time horizon, in the estimation of my finger-to-the-wind, ear-to-the-ground gut check.

Again thank you for sharing your insight; your article is very well written and I enjoyed the read!

Few People know that Exxon now own the contracts that Standard Oil secretly signed with Saudi Arabia,who agreed to allow Standard Oil to develop their Oil Field on the condition that 50% of the revenue would be deposited in their 1% per annum earning Trust accounts. Still sealed by an ancient agreement forged by People who are no longer alive,a staggering sum of $311 Trillion still festers in Exxon s Trusts. These are funds that would have & should have been released to invest in revitalising Business regeneratively,had the Arabs the Alacrity to try to break the shackles of Rockefeller original binding Contract.

When Jobs unlocked the power of the worldwide web using mostly Google Apps everyone said what a wonderful device the iPhone is. Outside of killing the PC, Apple has done nothing since it brought out the too-small tablet AKA iPhone. During this time Bezos built a monster server network dedicated to selling and Google built a worldwide network of world-class server farms.

In the meantime Apple built up $100B cash. I’ve got a hint for how to spend it.

When the author scrolls down the list of big cap technology he can’t find any names above 15 times forward 12-month earnings projections. Had he looked, he also would not be able to find any names in that group with anything remotely close to Apple’s revenue and earnings growth either. Yet Apple is lumped in with that sad sack bunch. Go figure…